Friday, May 30, 2008

On May 22, the Montana Food Distributors Association (“MFDA”) filed a class action lawsuit on behalf of retailers, wholesalers, and state retail associations that administer coupon programs for small retailers. The suit alleges that these industry stakeholders have been harmed by two coupon processors – International Outsourcing Services and Inmar, Inc. – that have conspired to defraud retailers, limit competition, and breach fiduciary obligations to serve as bona fide agents of retailers in the coupon redemption process.

“I was outraged to learn about coupon processors’ secret scheme to defraud small independent retailers and am convinced that the MFDA and Montana retailers have suffered for years as result of this scheme,” McKee Anderson, the MFDA’s Executive Director, said. “I am pleased that the MFDA has an opportunity to lead an effort to correct those wrongs."

The law firm representing the MFDA, Kotchen & Low LLP, anticipates that the lawsuit will benefit stakeholders within the retail industry not only through the recovery for prior harm, but also through the restoration of transparency and competition to an industry that has been beset by fraud and collusion.

Kotchen & Low’s managing partner, Daniel Kotchen, stated, “Our research into the coupon processing industry revealed that coupon processors have systematically and secretly defrauded the very retailers for which the processors purport to serve as agents.”

“While there was already a criminal fraud suit and a civil lawsuit targeting IOS and its executives, the interests of retail industry stakeholders have not been represented in those actions,” stated Daniel Low, also a partner at Kotchen & Low. “In order to prevent continuing coupon fraud, industry standards and reforms should be considered, along with greater transparency regarding coupon processors’ feesand services.”

The Washington, DC based law firm of Kotchen & Low LLP was founded earlier this year. The firm specializes in antitrust and fraud counseling and litigation and has a particular expertise in the consumer goods and retail industry. Visit http://www.kotchen.com/ to learn more about the firm, Mr. Kotchen, and Mr. Low.

Friday, May 23, 2008

On March 5, the Department of Justice searched the offices of Reddy Ice as part of an antitrust investigation. Between March 10 and now, over 70 lawsuits have been filed against Reddy Ice and its alleged co-conspirators.

According to the lawsuits, the main packaged ice manufacturers divided the market to avoid price competition. Allegedly, Reddy Ice was allocated the sunbelt states and the northwest, Arctic Glacier controls the central and northeastern states and California, and Home City Ice controls certain Midwestern states. With little overlap between territories and limited competition, the manufacturers were allegedly able to charge artificially high prices.

Their scheme was allegedly aided by the companies' acquisition of competitors. Reddy Ice has acquired over 100 smaller competitors since 1997, and Arctic Glacier has acquired over 60 competitors.

Sales of packaged ice are estimated around $1.8 billion annually, though half of that output is from in-house ice machines, and the other half is from ice manufacturers. The three major manufacturers collectively control about seventy percent of the sales of manufactured ice.

When the Department of Justice is investigating potential antitrust violations, it is common to see a large number of civil class action lawsuits follow if the potential damages are large enough, as was the case with the DOJ's chocolate price fixing investigation. While the plaintiffs in such cases often piggyback off of the DOJ's investigation without substantial investigation of their own, such cases still have the potential to benefit consumers through the direct compensation of class members as well as their deterrent effect on future antitrust violations. Of course, an even greater incremental benefit to a plaintiff class can be realized on the occasions when plaintiffs' attorneys discover wrongdoing themselves (as was the case with the class action complaint my firm filed yesterday on behalf of retailers).

Sunday, May 18, 2008

During that time, I've been hard at work on a few different cases, one of which promises to be a very positive development for the retail industry. My firm, Kotchen & Low LLP, is putting the finishing touches on a federal class action complaint on behalf of a class of small and large retail stores, including grocery, mass merchandise, and other stores that sell consumer packaged goods, along with wholesalers of the same products. In addition to seeking compensation for past harms, we are hoping that the lawsuit will spur industry-wide reforms that will provide greater transparency and decrease the risks that retailers will be defrauded in the future. I'll provide more details after the complaint has been filed.

Meanwhile, I'll do my best to return to posting on a more regular basis.

Friday, May 2, 2008

On April 24, the U.S. District Court for the District of New Jersey denied News America Marketing's motion for Summary Judgment in Floorgraphics, Inc. v. News America Marketing In-Store Services, Inc., No. 04-3500 (D.N.J.), a case I mentioned in this previous post. Floorgraphics alleged that News America engaged in a variety of anticompetitive conduct in an effort to drive it out of the in-store floor, coupon, and shelf advertising business, including computer hacking, false and disparaging statements, and tortious interference with contract.

In the summary judgment motion, Defendants argued that Floorgraphics mischaracterized News America's vigorous, aggressive competition as tort, and that there is no admissible evidence that Defendants made any false and disparaging statements about FGI, threatened retailers, or used confidential Floorgraphics information in bidding on retailer contracts. Defendants also argued that there is no evidence of causation.

Relying partly on affidavits and exhibits that were filed under seal, the District Court held that there are "genuine issues of material fact that would preclude the granting of summary judgment in Defendants' favor at this time." The court denied News' summary judgment motion on all counts. (Click here for the order).

Having lost its motion, News America Marketing now faces the prospect of a trial by jury in federal court. A jury trial is risky for any defendant, especially when the plaintiff alleges pernicious misconduct that could cause the jurors to strongly dislike the defendant.

I received an e-mail from a reader of this blog yesterday about this case. He suggested that a verdict against News America would lead to a number of related Plaintiffs' cases against News. I am not as positive as he is that a verdict for Floorgraphics will necessarily lead to new related cases. But if Floorgraphics prevails at trial, evidence of News' wrongdoing in this case might be used against News in related pending cases, and consumer goods manufacturers and retailers may want to assess whether they were negatively affected by News America's allegedly tortious and anti-competitive conduct.

Thursday, May 1, 2008

Discounts Upheld - Reversing the district court, the Tenth Circuit Court of Appeals held on April 25 that a supermarket can sell gasoline below cost under Colorado law when the sale is contingent on purchasing groceries above cost, and the price of the total bundle is above cost. See Parish Oil Co. v. Dillon Cos., No. 07-1032, 2008 WL 1837228, __ F.3d __ (10th Cir. 2008).

Defendant Dillon Companies, a subsidiary of Kroger, operates grocrery stores that include retail gasoline filling stations on the same premises. The stores offered discounts of up to 20 cents a gallon when customers satisfied minimum purchase requirements from the grocery stores. The profit margin on qualifying grocery sales, in the aggregate, exceeded the discounts.

Colorado Unfair Practices Act - Competing gas stations in Colorado brought suit under the Colorado Unfair Practices Act, complaining that the gasoline was sold below cost and hurt their sales. The Act prohibits below-cost product sales, and prohibits the sale of a bundle of products if the "selling price [is] below the cost of all articles . . . included in such transactions."

The district court held that the statute should not be read literally, and that the price of each item in the bundle should be considered separately. The district court found that this reading was supported by the stated purpose of the Act, which was to prevent evasion of the Act's prohibition on below-cost single-product pricing through multi-product sales.

Reliance on Aggregate Costs and Pricing - The Tenth Circuit disagreed, reading the text of the statute literally. The Court recognized that the purpose of many state unfair practices act statutes was to prohibit the use of loss leaders, and the practice at issue does not involve the use of a loss leader, which normally is used to lure buyers to purchase other products at the store under the false assumption that they are similarly low-priced.

The Court also recognized that stores often offered products below cost as part of a bundle, citing the example of a discounted cell phone offered with a service contract, and citing to an example of a customer loyalty card offering a free product discussed in an episode of Jerry Seinfeld:

JERRY: "Atomic Sub"? Why are you eating there?

ELAINE: I got a card, and they stamp it every time I buy a sub. Twenty-four stamps, and I become a Submarine Captain!

Thus, the Tenth Circuit reversed the lower court's ruling, finding that because the aggregate price of the bundle exceeded the cost, the practice was permissible under the Colorado Uniform Practices Act.

Above-Cost Aggregate Pricing Can Be Anti-Competitive - While the Court's ruling appears to be a correct reading of the statute, the statute fails to take into account potential scenarios in which an above-cost bundled price can be anticompetitive. For example, even if the competing gas stations were the most efficient providers of gasoline, Dillon's practices could potentially exclude them from the market because they cannot compete with the bundled product, harming consumers in the long run.

Discount Attribution Approach - The Peacehealth court examined whether a bundled discount constituted attempted monopolization under the Sherman Act. The court rejected the aggregate pricing approach that "condemns bundled discounts as anticompetitive only in the narrow cases in which the discounted price of the entire bundle does not exceed the bundling firm's incremental cost to produce the entire bundle." Id. at 904. Instead, the court adopted a "discount attribution" standard under which "the full amount of the discounts given by the defendant on the bundle are allocated to the competitive product or products." Id. at 906. (The Peacehealth decision explicitly disagreed with the Third Circuit's standard in LePage's Inc. v. 3M, 324 F.3d 141 (3d Cir. 2003), which did not require any evidence of below-cost pricing).

The Peacehealth court gave the example of two shampoo producers, one of which also makes conditioner. Id. at 897, 906 n.14. Hypothetically, producer A offers shampoo for $3 and conditioner for $5, but as a bundle for $2.25 and $3. Producer B only makes shampoo and not conditioner. In order to match the bundled price, B must price its shampoo at 25 cents, which combined with A's individual conditioner product price of $5 achieves the combined price of $5.25. Thus, if Producer B's variable costs exceeded 25 cents, it would likely be driven out of business by A even if B were the more efficient producer. Under the Peacehealth standard, the entire discount for the bundle would be allocated to the competitive product – shampoo – and the court would find producer A's practice anticompetitive if its variable costs exceeded 25 cents.

In the context of the Dillon's case, if a supermarket with a monopoly on grocery sales offered a discount on gasoline sales, then the discounted price of gasoline must exceed its costs, regardless of whether the store achieved an aggregate profit.

Conclusion - In sum, retailers offering bundled product pricing must be careful that their practices comply with federal and state laws, which can vary significantly by jurisdiction. They should be especially cautious if they have market power in any of the relevant product markets or if their discounting could be seen as pricing one of the products in the bundle below cost.

About Me

Daniel Low, Esq.

After litigating cases related to in-store consumer packaged goods ("CPG") marketing, I became interested in issues related to the CPG industry, including CPG-related advertisers and retailers. This blog is intended to inform readers about relevant legal developments that affect the industry.
I graduated from Yale Law School, clerked for a federal appellate judge, was a trial attorney at the U.S. Department of Justice, and worked at a top D.C. litigation firm. I joined Daniel Kotchen in founding the civil litigation firm Kotchen & Low LLP, which specializes in issues related to the consumer goods and retail industries.

Contributors

Daniel Kotchen, Esq.

Mr. Kotchen is a litigation attorney licensed to practice in Washington, DC and Wisconsin. He is a founding partner of the law firm Kotchen & Low LLP, and has worked at the FTC, has worked as in-house counsel for a major CPG, and has worked at top litigation firms in DC.

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